Transcript Beograd 2011

Израчунавање премије осигурања
живота
dr. Darko Medved
Hotel „SLAVIJA“, Beograd,
9. i 10. decembar 2011. godine
KALKULACIJA PREMIJE
 Insurance premium structure
 Classical life insurance pricing
 Profit testing
 Parameterization
 ABC&TC
2
Insurance premium structure


The insurance premium is a price for insurance service and defined by
an insurance contract between the policyholder, the insured person and
the insurance company.
The gross premium consists of the technical premium and the
operating cost. The operating cost supplies the money for the exercise
of the insurance business. The technical premium is the premium,
intended for substituting claims, and is calculated according to the rules
of actuarial mathematics.
Operating
fund
Technical premium
Gross premium
Operating
cost
Risk premium
sum insured
Balancing
risk
Savings
premium
Mathematical
reserve
Mathematical
reserve
3
sum at
risk
1….from savings premium and interest
2….covered from the risk premium
Elements that affect the premium
K ZP = F(B, N , BO , M , O , I, E, s, x, f, e m, pr, n,m)


The amount of insurance premium is
foremost dependent on the nature of
the insurance coverage, included in
the insurance contract.
The insurance premium is the
function of general parameters,
which determine the group of
insurances in an individual insurance
class, and special parameters,
which finally determine the premium
on the basis of an individual
insurance contract.
B
The form of insurance coverage
N
Investment policy of the term business fund
BO
Parameter, describing the way of calculating
the bonus
M
Mortality tables
O
Surrenders
I
Technical interest rate
E
Costs, embedded into insurance premium
s
Benefit
x
Age of the insured person
f
Gender of the insured person
em
extra mortality
pr
Level of profitability
n
Insurance duration
m
Mode of payment of the insurance premium
4
Types of costs in the insurance industry
The analysis of costs in an
insurance company
Cost of claims
Operating costs
Assessment
costs
Insurance acquisition
costs
Interest costs
Compensation
costs
Other operating costs
Amortization of
investment funds
Labor costs
Amortization
Other costs
5
Investment costs
Investment
management
costs
Types of costs in the insurance industry
 Costs of claims present the category of costs, that are directly linked to the
process of settling of the insurance claims.
 Operating costs present in the strict sense the costs of the acquisition cost
and other operating costs.
 Acquisition costs cover the direct costs, linked to insurance admission:
 Commission for insurance agents
 Insurance underwriting costs
 Costs of issuing an insurance policy
 Advertising costs
 Insurance acquisition costs present the majority of operating costs in
insurance balance sheets, therefore insurance companies pay particular
attention to these costs.
6
Distribution of cost structures

7
The following aspects must be considered in the cost
structure of the insurance premium:
 Technical aspect (actuarial aspect)
 Customer aspect
 Organizational aspect
 Time aspect
Distribution of cost structures


8
Actuarial aspect
 Basic insurance coverage
 Additional benefits
 Accelerators
 Options (for example the option of increasing the insurance sum)
 Guarantees (guarantees of rates, capital)
Customer aspect
 The customer decision is made in terms of buying preferences
(insurance premium: service)
 The premium reflects the value of individual benefits in the eyes of
the customer
 Insurance as such have no concrete manifestations (selling an
invisible product)
Distribution of cost structures

Organizational aspect (value chain)
 Aspect by business processes





Developing a new product
Marketing and sale
Underwriting
CSC
Claims process
Development
Marketing
and sale
Underwriting
process
Value chain
9
Customer support
Claims
process
Distribution of cost structures
Costs
Distribution of costs according to the time (time aspect):
 Initial costs are costs, that occur in the first insurance years after
issuing the insurance policy.
 Adminstration costs are costs, linked to the maintenance and
servicing of existing policies and insured persons.
 Closing costs are costs, linked to the settlement of insurance
Time
Time
claims.
Costs

endowment
10
annuity
Cost structure - example
- variable cost = mainly
connected with maintenance
of portfolio
- fix cost = does not depend on
size of portfolio
(management, IT)
- initial cost: sales cost,
development
type
variable
fix
pensions
2,0%
10, 0
unit linked
4,0%
12,8
term
5,5%
12,5
accident
6,0%
2,6
health
5,0%
4,9
 Insurance premium structure
 Classical life insurance pricing
 Profit testing
 Parameterization
 ABC&TC
12
Classical calculations of insurance premium
There are basically two approaches:
 Classical calculation:
 PV (premium) = PV (liability) + PV (costs)
 Emerging of profit is not allowed (profit margin)
 Surrrenders are not considered
 Return on investment not considered
 Cost of capital not considered
 New business strain
 Not possible for unit linked products
 Profit test:
 Discounted cash flow principle
 Risk discount rate is considered
 Basis for serious actuarial calculations of premium
13
Classical calculations of insurance premium




14
In the insurance premium calculations for life insurance it is
important to remember that it must follow the principle of
equivalence.
Principle of equivalence:
The present expected value of premiums and payouts is equal to
zero.
Random variable L is the variable of total loss of the insurance
company. The technical insurance premium is obtained to satisfy
the principle of equivalence.
Law of large numbers
Classical calculations of insurance premium





The present value of payouts of the insurance contract is Z.
K is the random variable of the time of payouts.
The expected present value of the random variable E(Z) is the single
technical premium.
For example: endowment
Single premium
 v K  1 za K  0,1, ..., n  1
Z  n
za K  n
v
n 1
A x :n  E ( Z ) 
15
v
k 0
k 1
k
pxqxk
PK  k 

v
n
n
px
k
pxqxk
Classical calculations of insurance premium
Technical premium
 We define a new random variable L as the difference between the
present value of payouts and the present value of premiums paid.
 Thus chosen random variable may occupy negative as well as positive
values, which presents a loss or a surplus for the insurance company in
the sense of value.
 The technical insurance premium is achieved by satisfying the principle
of equivalence.
E(L)  0
16
Classical calculations of insurance premium
 v K 1  P a
x :n K  1
L n
 v  Px :n a n
K  0,1, ..., n  1
K n
E ( L )  0  A x :n  Px :n a x :n
17
Classical calculations of insurance premium
Gross premium
K Px :n a x :n  A x :n     K Px :n a x :n   a x :n
18
Calculation of insurance premium
A simple and generally
understandable example of
calculation of the technical
premium for endowmnet life
insurance.
19
 Insurance premium structure
 Classical life insurance pricing
 Profit testing
 Parameterization
 ABC&TC
20
Profit testing
1.Characteristics
Principle of discounted cash flow
Risk discount rate is being considered
Basis for any serious actuarial calculation of premium
For unit linked products the profit test is used
Key test for the decision to launch new products
Sensitivity of the parameters can be tested
Useful for target cost method
Appropriate set of parameters is very important
The technical composition of insurance premium is not important
21
Profit testing
2. Parameters
Discount rate
Fixed costs per unit of product
Variable costs per unit of product
Best possible estimate of frequency and amount of claims
Surrenders
Investment returns
Cost of capital
3. Expected cash flow
22
Profit testing
Pt
- Et
(Pt - Et )*it
Paid premium
Incurred costs at the beginning of the year
Interest earned
- Dt * qx+t-1
Expected cost of claims
- St * px+t-1
Expected cost of survival
CFt is the expected cash flow for the insured person (x), still alive
in the beginning of the year t:
23
Profit testing
CFt = Pt - Et + (Pt - Et) it - Dt qx+t-1 - St px+t-1
Then we can define:
ECt = CFt * t-1px ,
t = 1,2,..,n
4. Principle of equivalence
Presuming: i = i. On the day of issuing the policy the principle of
t
equivalence must be used:
24
Profit testing
Σ Pt * vt-1 * t-1px = Σ [Dt * vt * t-1px * qx+t-1 + St * vt *tpx+ Et * vt-1 *t-1px]
We get
Σ vt* t-1px * [Pt (1+i) - Dt * qx+t-1- St * px+t-1 - Et (1+i) ]=0
or
Σ vt t-1px CFt = 0
or
Σ vt ECt = 0
Principle of equivalence: the present value of cash flow from insurance
policy must be equal to zero.
25
Profit testing
5. Cash flow with mathematical reserve
PROFIT VECTOR {PROt}
PROt =(m-1V +Pt - Et )* (1+ it) - Dt qx+t-1 - (St + mV)px+t-1
Vector
{ t-1px PROt }, t=1,..,n
represent emerged profit from contract
Σ vt t-1px PROt = 0
26
Profit testing
6. Measures of profitability
Net present value
NPV = Σ (1+id)-t t-1px PROt
Profit margin
Σ (1+id)-t t-1px PROt
------------------------Σ (1+id)-(t-1) t-1px Pt
27
Profit testing
Internal rate of return (IRR)
Σ (1+iIRR)-t t-1px PROt = 0
28
RP Unit Linked product – Client fund
Unit fund
5%
SV
Years AV
7%
SV
AV
10%
SV
AV
1
170,94
0,00
172,81
0,00
175,65
0,00
2
528,95
0,00
538,32
0,00
552,78
0,00
3
1.019,85
968,86
1.045,91
993,61
1.086,69
1.032,36
4
1.588,10
1.508,70
1.642,66
1.560,53
1.729,29
1.642,83
5
2.174,54
2.065,81
2.271,01
2.157,46
2.426,57
2.305,24
6
2.780,02
2.752,22
2.932,95
2.903,62
3.183,54
3.151,70
7
3.406,12
3.372,06
3.631,27
3.594,96
4.006,42
3.966,36
8
4.054,03
4.013,49
4.368,50
4.324,82
4.901,50
4.852,49
9
4.725,50
4.678,25
5.147,81
5.096,33
5.876,14
5.817,38
10
5.421,33
5.367,12
5.971,54
5.911,82
6.937,34
6.867,97
11
6.143,12
6.081,69
6.842,92
6.774,49
8.093,47
8.012,54
12
6.892,40
6.823,48
7.765,26
7.687,61
9.353,56
9.260,02
13
7.671,32
7.594,61
8.742,61
8.655,18
10.727,98
10.620,70
14
8.482,12
8.397,30
9.779,28
9.681,49
12.228,04
12.105,76
15
9.327,15
9.233,88
10.879,82
10.771,02
13.866,07
13.727,41
16
10.209,00
10.209,00
12.049,24
12.049,24
15.655,68
15.655,68
17
11.130,52
11.130,52
13.292,96
13.292,96
17.611,81
17.611,81
18
12.088,85
12.088,85
14.610,88
14.610,88
19.744,83
19.744,83
19
13.081,21
13.081,21
16.003,02
16.003,02
22.066,10
22.066,10
20
14.108,79
14.108,79
17.473,56
17.473,56
24.592,24
24.592,24
RP Unit Linked product –company fund
MONTH
1
2
3
4
5
6
7
8
9
10
11
12
3,95
3,89
3,84
3,78
3,73
3,68
3,62
3,57
3,52
3,47
3,42
3,37
AQUSITION
30,00
29,57
29,15
28,73
28,32
27,92
27,52
27,13
26,74
26,36
25,99
25,61
Mf
INTERESTS
0,02
0,03
0,05
0,07
0,08
0,10
0,11
0,13
0,14
0,16
0,17
0,18
0,00
0,08
0,08
0,08
0,08
0,08
0,08
0,08
0,08
0,08
0,08
0,08
RISK PREMIUM
2,07
2,03
2,00
1,97
1,94
1,91
1,88
1,85
1,82
1,79
1,77
1,95
CLAIMS
0,93
0,92
0,90
0,89
0,88
0,86
0,85
0,83
0,82
0,81
0,80
0,88
50,00
49,29
48,59
47,91
47,23
46,56
45,90
45,25
44,61
43,98
43,35
42,74
42,00
1,97
1,94
1,92
1,89
1,86
1,84
1,81
1,79
1,76
1,74
1,71
0,00
0,71
1,40
2,06
1,95
2,14
2,22
2,18
2,05
1,82
1,49
1,08
0,20
0,39
0,57
0,75
0,92
1,09
1,24
1,39
1,54
1,68
1,81
1,93
ENTRANCE FEE
COMMISSION
OTHER COSTS
RETURN OF COMM.
SURRENDER PENALTY
CF
-56,70
-15,47
-14,35
-13,26
200.00
-12,96
-12,37
-11,91
-11,56
-11,32
-11,19
-11,16
-11,12
Profitability measures
150.00
100.00
50.00
0.00
-50.00
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20
-100.00
-150.00
-200.00
-250.00
30
Benchmarks
 term insurance – 10 to 18
 unit linked – 5 to 12
 endowmnet – 8 to 14
 Insurance premium structure
 Classical life insurance pricing
 Profit testing
 Parameterization
 ABC&TC
32
Parameters in determining the premium







33
Demographic assumptions
Return on investment
Costs
Inflation
Surrender
Safety margins
Expected profit
 Risk discount rate (RDR)
 Profit criteria
 Net present value (NPV)
 Internal rate of return (IRR)
Demographic assumptions
Mortality tables

Incidences of critical illnesses

Sickness tables

Annuity tables
Incidences must reflect the future expectations of individual risk for
insured persons.
This values can be obtained by the transformation of standard population
tables.
If the insurance company has enough data, it can include data from its
claim experiance.
Alternatively, actual experience from comparable insurance class can be
considered.





34
Demographic assumptions






35
For creating one’s own tables, homogenous data for a sufficient number of
years is necessary.
If the insurance company has no appropriate data for making incidences, it
is recommended, that they be made in the future.
If the company has no appropriate own data, the data on the level of the
industry may be used, if it is available.
Data from reinsurance companies can be used.
Such an approach is recommended, if we are entering the market for the
first time or if we have no experience with the new insurance class.
One’s own tables/incidences have to be constantly checked and
supplemented.
Demographic assumptions - Analysis
Factors affecting the actual incidence of mortality:
 Age
 Gender
 Time period from beginning of insurance
 Sales channels
 Market segments
 Cause of claim
 Suicides
36
Return on investment
To consider:







37
Long-term conservative expectations regarding each type of investment
(shares, bonds,…)
The scope of investment guarantee  affects the type of investment in
which the premium is invested
The impact of the expected investment return on the profits from the
contract  the higher the impact, the greater the accuracy
The impact of the reinvestments of the existing investments
Expected investment mix for the product
The current return on the investment mix for the product
Types of investments (AFS, HTM, HFT)
Costs





38
Especially important, because it can significantly affect the
profitability of the insurance contract.
Cost parameters have to reflect the expected costs through the
whole insurance process.
Cost parameters are set for each insurance class on the basis of
normal – theoretically justified costs.
Cost have to be determined on the product unit:

Depending on the premium

Depending on the insurance sum

In fixed amount
If the insurance company has no adequate data for cost analysis 
analysis of similar products  using data on the industry level 
reinsurance  detailed analysis of the processes and costs
connected to them.
Costs




39
Including fixed costs presents a special risk  when the number of
sold insurance at a fixed cost is estimated in the wrong way
Management, development and marketing costs are usually fixed
costs
Fixed costs can be distributed:

As a fixed addition to the premium

Divided into classes according to the amount of the insured
sum
The commission amount is usually the parameter that is set in the
product development phase and presents the market price for the
concluded insurance  information from market is important 
reinsurance  experiences of countries with a comparable level of
development
Inflation cost growth
To be considered:





40
The current inflation rate  growth of retail prices  growth of
wages
Expected future inflation rates
The difference between the return of government bonds with
fixed return and government bonds with variable return
Medium and long-term economic forecast
Rate of economic development
Surrenders





41
The level of surrenders should reflect the expected development of
insurance in future years
Experiences of insurance companies from the same or from similar
products must be considered  the market  reinsurance
Calculating:
 1,2,3,6-monthly rate of resignations
 1,2,3,4,.. annual rate of resignations
Average 12-monthly rate of surrender: checking all insurance policies
in our portfolio, when they were aged 12 months
Generational sustainability:
checking all insurance policies, that were concluded in a given
calendar year and are 12 months old
2009
2010
Surrender
LR12 = AP>12 / ALLP>12
LR12
average 12-monthly rate of resignations
AP>12
number of policies, older than 12 months, that
were alive at the age of 12 months
ALLP>12 number of policies that are or may be aged at least 12
months
product idea!
include this into
pricing
8%
42
1
2
3
25
Surrender- Analysis
Main factors affecting the rate of surrenders:
 Time period from insurance entry
 Sales channels
 Market segment
 Premium payment method
 Type of contract
 Terms of withdrawal/ exit penalties
 Frequency of payment
 Single premium / premium in instalments
 Medical condition
43
Margins




44
The parameters are initially estimated as the closest approximation
When the profit test method is used in calculating premiums, the risk
premium for future whitrawals from assumptions may be included:
 through RDR
 Including explicit safety margins on the parameters
When the premium is calculated based on a formula, the additions to
the basic parameters are the only way to integrate risk premiums
Examples:
 Mortality (10% do 20% loading)
 Costs (10% on the best estimated cost)
 A conservative rating of the number of sold insurance is assumed
Expected profit
RDR




45
The owners decide where to invest their resources on the
basis of:
 Benchmarks
 Risk investment rate
 Mobility of the investment
Basic rule: the investor will require a higher expected return
for more risky investments than for more secure investments
 compensation for default risk
In other words, investors require a risk premium for the risk
they assume
Also investors in insurance companies require a higher return
than the return of risk-free securities; therefore the return:
return on risk-free securities + risk premium
Expected profit
RDR



46
The questions is, what is the appropriate risk premium in a life
insurance company
RDR is not determined only by an actuary, the market also sets
the return
At risk work RDR, it has to be considered:
 Macroeconomic environment
 Position of the company
 Product complexity
 Parameter stability in a product
Expected profit
NPV





To optimize the NVP is the main priority of any manager
Is the best criterion of profitability
NPV can be presented in relation to the initial investment (for
example commission)
NPV can be presented as a share of total premiums (prices)
Can be used for the initial assessment of the value of the
company
IRR


47
IRR is the interest rate, in which the sum of discounted future
cash flows equals 0
If all other assumptions are equal, the company should favour
products with a higher IRR
 Insurance premium structure
 Classical life insurance pricing
 Profit testing
 Parameterization
 ABC&TC
48
ABC method in the insurance industry
• Important method in the insurance industry
• according to research more than 52% of financial institutions in
the UK use the ABC method
• CEE is only at the beginning of this process
Indirect costs
First stage aloocation
(cost drivers)
Cost center
of activity 1
Cost center
of activity 2
Cost center
of activity N
Allocation of the second
stage (activity drivers)
Direct costs
49
Cost units (insurance classes, customers, business processes, market
channels)
ABC method in the insurance industry




Method of calculating costs based on activities is a method that takes
into account that costs arise as a results of activities, which are cost
drivers.
The basic idea behind the ABC method is that costs are not caused by
products and services, but activities, products and services are mainly
the end result of such activities.
Activities consists of a concrete business process.
The ABC method is a two-steps calculation of costs :





50
In the first step costs are collected on the activity level, that are consolidated
into activity based cost centres or cost pools;
In the second step costs from the activity based cost centres are arranged
on cost objects;
The organizations is guided by the activity cost drivers or the activity criteria;
The activity criteria is usually set in quantitative units, not in units of value.
Cost objects in the insurance industry are products, clients, marketing
channels, markets, individual processes and similar.
ABC method in the insurance industry
Activities of the insurance
underwriting process
Activities of the insured support
process
Activities of the claims process
Acquiring the documentations
Risk assessment
Obtaining consent of clients
Informing clients of decisions
Concluding the insurance
contract
Collection of insurance premium
Capture the offers
Consideration of purchase
Consideration of advance
Renewals of contracts
Proceedings of unpaid
premiums
Other changes
Providing information
Application of insurance claim
Recording the claim
Acquiring the documentation
Determination of payment
Identification of the bases of
claims
Determination of the claim
amount
Paying the insurance fee
Notice of transfer
Archiving of documents
Complaints
 Activities are composed of several tasks
 Activities are not necessarily separated organizationally
 Beware of the number of monitored activities
51
ABC method in the insurance industry
Activity
Activities criteria
Report of insurance claim
Number of applications
Registration of the insurance case and opening the claims file
Number of registrations
Acquiring the relevant documentation
Number of documents
Determination of the amount of reservations according to the
survey
Amount of registration
Determination of the base of the claim
Number of registrations
Determination of the amount of the claim
Number of insurance claims
Paying the insurance fee
Number of payments
Notice of transfer and the termination of the settlement of the
claim
Number of transfers
Archiving of documents from the claim files
Number of insurance claims
Complaints
Number of complaints
52
ABM



ABC as the by-product provides information about the costs of
individual activities in a business process.
The use of this information and making business decisions based
on such information is the basic concept of the activity based
management (ABM).
The ABM concept is used in different methods of cost
management:
 Reduce costs,
Aspect of
calculating costs
 Activities based planning,
 Business performance measurements,
Business
process
 Benchmarking,
elements
Process aspect
 Reenegenering business processes.
Cost drivers
Activities
Cost
objects
53
Performance
measures
The use of ABM in the insurance industry
Traditional analyisis
Wages
Travel expenses
ABM analysis
5000
500
Application of insurance
claim
Acitvities
measurement
500 Number of
#
1000
applications
Registration of the insurance
case
1500 Number of
5000 Number of claims
900
1300
900
registrations
Information
technology
1500
Determination of amount of
the claim
Rent of premises
1000
Paying the insurance fee
700 Number of fees
Total
8000
Complaints
300 Number of
10
complaints
How much was spend?
Total
8000
For what purpose was it spend?
54
Actuarial models for premium determination
The link between profits test and ABM
Cost of activity (ABM)
Costs of claims
 Time component of cost
 Probability of the formation
Actuarial model
(profit test)
 Cost amount
Insurance
premium
55
Activities of the insurance
admission process
Activities of the insured
person’s support process
Activities of the claims process
Acquiring the documentations
Risk assessment
Obtaining consent of clients
Informing clients of decisions
Concluding the insurance
contract
Collection of insurance
premium
Capture the offers
Consideration of purchase
Consideration of advance
Renewals of contracts
Proceedings of unpaid
premiums
Other changes
Providing information
Application of insurance claim
Recording the claim
Acquiring the documentation
Determination of payment
Identification of the bases of
claims
Determination of the claim
amount
Paying the insurance fee
Notice of transfer
Archiving of documents
Complaints
Actuarial models for premium calculation
The link between profits test and ABM




56
The costs of activities are taken into account instead of the classical
costs criteria.
The probability of event is determined for the activities.
The majority of activities are connected with the basis probability of
the insured event.
Activities are included in the profit test model according to the
formation time in the life span of an insurance product.
Target costs - definition
1. The process of target costs is a system of profit planning and cost
management that is:




Price oriented
Focused on costumers
Focused on development, and
Cross functional.
The concept of target costs initiates cost management at the earliest stages
in product development and is used trough the entire product life span with
the active involvement of the entire value chain (Anasari).
2. The concept of target costs in the insurance industry is defined as a
comprehensive system of proactive cost management from the
development of a new product to sales and marketing of the insurance
product, or in the entire demand period for insurance services in terms of
insurance admission, the insurance claims process and the customer
support process. Based on the result that costs cannot be controlled with
standard cost systems, as recognised by the market and the competition.
3. Target costs are different from the traditional calculation of costs plus in the
way that the target costs are the function of the product’s market price, the
desired profit and market share, and not on the contrary, that the selling
price depends on the projected cost. With the target costs method the profit
and cost structure of the product is determined, even before we start to its
development.
57
Target costs
The characteristics of target costs






58
The price of the service determines the costs (the costs of claims
and the operating costs) and not vice versa
Customer oriented
Focused on development
Functional integration in the development of new products
(important in the insurance industry)
Orientation to the long-term cost management
- life insurance is a long-term contract
Cost management in the entire value chain
Target costs
The characteristics of target costs

The market price defines the
develomplent of a new product
The premium sets the costs
C  P 

Orientation to customers

Focused on development
Meeting the customer’s expectations
regarding quality, price and speed of
service
The most costs of the products
are defined during the
development phase
Target costs concept
Planning
phase
59
Design and
construction
phase
Implementation
phase
Testing phase
Target costs
The characteristics of target costs
Functional connectivity in development
Actuaries
Underwriting
Claims
Insurance administration
Informatics
Marketing
Sales
Law
Reinsurance
60
Multidisciplinary project
group of the new product
development
Process of target costs



61
Planning a new product
Determining target costs
 Determining the market price
 Determining the target profit
 Definition of target differences
The use of techniques to achieve the target costs
Planning a new product
Product development phases
Decomposition of insurance product
Initiative
Pricing strategy
Endowment
(basic risks)
Amount of basic
coverage
Premium payment
method – free or
bound
Profit sharing
Market
research
Product
concept
Realizability study
Marketing strategy
Additional risks
CI
Additional accidence
insurance
Waiver of premium
payment in case of
illness
Waiver of premium
payment in case of
unemployment
Protecting the family
in case of illness
…
Option of retraining the
insurance into insurance in
perpetuity
Option of raising the insured
sum in the event of
childbirth
62
Premature
redemption
Insurance inactivity
Insurance coverage,
options
Insurance conditions
Premium return
guarantee
Without medical
examination
Prototype 1
Insurance
documentation
Prototype 2, …
Risk management
processing
Insurance premium
Final form
Determination of target costs
Determination of market premium
Customers
Value of
detection
Key factors:
Loyalty
Competition
Quality and
relative
functionality
MARKET PRICE
Price
 Brand power
 Target market share
Reputa
tion
Market
share
Long-term
profitability
Strategic goals of the company
63
 Value of percetion of added
options and functionality
Determination of target costs
Determination of target profit

Net present value (NPV)
n
NPV 

k 1

(1  i R D R )

k 1
C Fk
(1  i IR R )
k
 0
Net present value share in the initial commission
NPV
c o m m is s io n
64
k
Internal rate of return (IRR)
n

C Fk
Determination of target costs
Determination of target difference
Target costs
Planned costs
Target difference
Cost analysis
Methods to
reduce costs
To calculate the target difference it is
necessary to know how much we spend
today!
65
Determination of target costs
Example profit test
Market premium
Target profit
Cost share
Gross
Year
premium
980,00
EUR
50 %
Paid commissions
245
EUR
14 %
From gross premium
Operating
costs
Costs of
claims
Change
MR
Market
Target
costs
premium
profit
1
Interest on
MR
Cost of
capital
0
980,00
- 690,00
0,00
- 541,17
0,00
0,00
1
786,39
- 40,32
- 59,50
- 769,86
29,76
- 2,60
2
645,02
- 33,58
- 91,97
- 676,07
72,11
- 6,29
3
546,29
- 28,89
- 77,22
- 664,97
109,29
- 9,54
4
462,63
- 24,85
- 89,91
- 615,27
145,86
- 12,73
5
391,73
- 21,38
- 97,65
- 568,30
179,70
- 15,68
6
331,64
- 18,39
- 101,52
- 523,95
210,96
- 18,41
7
280,74
- 15,83
- 102,43
- 482,17
239,78
- 20,93
8
237,62
- 13,62
- 101,09
- 442,89
266,30
- 23,24
9
201,11
- 11,72
- 98,12
- 406,00
290,66
- 25,37
10
0,00
0,00
- 1835,43
5690,64
312,99
- 27,32
4863,17
- 898,58
- 2654,83
- 1930,90
885,00
- 77,24
NPV
Planned
2
Commission
490,00
Premium
4863,17
Other operating
costs
408,58
Interest
885,00
Claims
Total
2654,83
Result
- 1930,90
Capital
- 77,24
3553,41
3
3740,02
Target costs
Target
difference
3495,02
58,38
245
66
Determination of target costs
Decomposition of target costs in the insurance industry
Category
Operating costs
Method
1. Development and
marketing
67
Insurance
premium
Costs of claims
- Commissions
- Analysis of the impact of reducing
commissions on the sales
range
- Search for new sales channels
- Other initial costs
ABC/M
Distribution of
target difference
2. Customer support process
ABC/M
Commissions
3. Claims
- Quality risk management system
- Actuarial control cycle
Operating costs
Current
costs
Target
costs
Target difference
490
490
0,00
408,58
369,16
39,42
Claims
2654,83
2635,10
19,73
Total
3553,40
3494,26
59,15
Implementation of target costs
Methods:
 VE
 ABM
 Risk management
 BPR
 Benchmarking
Two-stage implementation of target costs
1. Manufacture of the product that will be as close as possible to
target costs -> Analysis of value
2. Design and implementation of activities associated with
business processes -> ABM
68
Value engeneering
Desired properties of the product from the customer’s
perspective
Functionality of the product
Mixed life insurance
(basic risks)
Safety for the family
Flexibility
Amount of basic
coverage
Living benefits
Covering various life events
Premium
payment method
– free or bound
Additional risks
Additional
insurance for the
risk of major
diseases
Exemption of
premium
payment in case
of illness
Additional
accidence
insurance
Protecting the
family in case of
illness
Option of retraining the
insurance into insurance
in perpetuity
As little administration as possible
69
Profit sharing
Option of raising the
insured sum in the
event of childbirth
Premature
redemption
Insurance
inactivity
Exemption of
premium
payment in case
of
unemployment
Advance
Premium
return
guarantee
Without
medical
examination
VE presents a systematic,
interdisciplinary study of
factors affecting the costs
amount in a product, in
order to determine
whether it can be created
at lower costs, without
sacrificing the
characteristics,
functionality, reliability
and usefulness of the
product.
Implementation of target costs
ABM
ABM process



70
Identifying the main activities in the company
Allocating indirect costs to cost units of activities
Selection of appropriate criteria of activities
Implementation of target costs
ABM





71
The business of the company is viewed as a chain of related
activities
Obtain information about the main activities in the company
Based on thus obtained information, we can eliminate
unnecessary activities
The basis for the use of different cost management techniques
Primarily it is a activities management model within the company
Implementation of target costs
ABM





72
Supplementing ABM and target costs
In the insurance industry, we follow the process logic
 ABM follows the process logic
When activities are cost categories, the target difference can be
arrange more specifically
By allocating target costs by activities, a more accurate picture can
be obtained, where the target difference is formed
ABM
 Specifies the target difference by activities
 By managing activities their costs are reduced
The model of target costs in the insurance industry
Competition
Qualit
y
Price
BSC (strategy, vision)
Customers
Value
Loyalty
Repu
tatio
n
TARGET
COSTS
Profit test
73
Profitabil
ity
TARGET
PROFIT
MARKET PRICE
Procedures supporting the target costs
achievement in insurance
ABC/M – activity analysis
Risk management
Redesigning business process
Benchmarking
Analysis of value
Quality assurance
Marke
t share
Target
difference
Standard
costs
КРАЈ
74